UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1999
Commission File Number: 0-19822
LITCHFIELD FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3023928
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
430 MAIN STREET, WILLIAMSTOWN, MA 01267
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (413) 458-1000
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
As of August 9, 1999, there were 6,984,166 shares of common stock of
Litchfield Financial Corporation outstanding.
FORM 10-Q
LITCHFIELD FINANCIAL CORPORATION
FORM 10-Q
QUARTER ENDED JUNE 30, 1999
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements................................. 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........ 15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.................................... 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................... 23
Item 2. Changes in Securities and Use of Proceeds............ 23
Item 3. Defaults Upon Senior Securities...................... 23
Item 4. Submission of Matters to a Vote of Security Holders.. 23
Item 5. Other Information.................................... 24
Item 6. Exhibits and Reports on Form 8-K..................... 38
SIGNATURES........................................................ 40
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
LITCHFIELD FINANCIAL CORPORATION
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
June 30, December 31,
1999 1998
-------- ----------
(unaudited)
ASSETS
Cash and cash equivalents...................... $ 21,983 $ 10,537
Restricted cash................................ 27,598 27,898
Loans held for sale, net ...................... 13,351 19,750
Other loans, net .............................. 219,944 191,292
Retained interests in loan sales, net ......... 32,603 28,883
Other.......................................... 25,110 15,522
-------- --------
Total assets............................. $340,589 $293,882
======== ========
LIABILITIES, COMMITMENTS AND STOCKHOLDERS' EQUITY
Liabilities:
Lines of credit............................. $ 62,012 $ 49,021
Accounts payable and other liabilities...... 8,741 9,812
Dealer/developer reserves................... 9,365 9,979
Deferred income taxes....................... 9,086 8,388
Long-term notes............................. 133,897 134,588
-------- --------
Total liabilities........................ 223,101 211,788
-------- --------
Commitments:
Litchfield Obligated Mandatorily Redeemable
Preferred Securities of Trust Subsidiary
Holding Debentures of Litchfield.......... 26,200 ---
Stockholders' equity:
Preferred stock, $.01 par value; authorized
1,000,000 shares, none issued and
outstanding............................... --- ---
Common stock, $.01 par value; authorized
12,000,000 shares, 6,983,366 shares issued
and outstanding in 1999 and 6,886,329
shares issued and outstanding in 1998..... 70 69
Additional paid in capital.................. 59,644 58,040
Accumulated other comprehensive income...... 3,352 1,250
Retained earnings........................... 28,222 22,735
-------- --------
Total stockholders' equity............... 91,288 82,094
-------- --------
Total liabilities, commitments and
stockholders' equity..................... $340,589 $293,882
======== ========
See accompanying notes to unaudited consolidated financial statements
LITCHFIELD FINANCIAL CORPORATION
Consolidated Statements of Income
(In thousands, except share and per share amounts)
Unaudited
Three Months Ended June 30,
1999 1998
-------- ------
Revenues:
Interest and fees on loans................... $8,477 $6,055
Gain on sale of loans........................ 4,262 3,452
Servicing and other income................... 533 466
------ ------
13,272 9,973
------ ------
Expenses:
Interest expense............................. 4,724 3,695
Salaries and employee benefits............... 1,438 1,147
Other operating expenses..................... 1,061 916
Provision for loan losses.................... 500 460
------ ------
7,723 6,218
------ ------
Income before income taxes and distributions on 5,549 3,755
preferred securities............................
Provision for income taxes...................... 2,137 1,446
Distributions on preferred securities (net of tax 205 ---
benefit of $128)................................ ------ ------
Net income...................................... $3,207 $2,309
====== ======
Earnings per common share amounts:
Basic ....................................... $ .46 $ .40
Diluted ..................................... $ .45 $ .38
Weighted average number of shares:
Basic ....................................... 6,908,145 5,754,018
Diluted ..................................... 7,186,471 6,117,832
See accompanying notes to unaudited consolidated financial statements.
LITCHFIELD FINANCIAL CORPORATION
Consolidated Statements of Income
(In thousands, except share and per share amounts)
Unaudited
Six Months Ended June 30,
1999 1998
Revenues:
Interest and fees on loans................... $16,364 $11,288
Gain on sale of loans........................ 6,879 5,679
Servicing and other income................... 1,104 959
------- -------
24,347 17,926
------- -------
Expenses:
Interest expense............................. 9,352 6,692
Salaries and employee benefits............... 2,704 2,280
Other operating expenses..................... 2,039 1,869
Provision for loan losses.................... 1,000 810
------- -------
15,095 11,651
------- -------
Income before income taxes and distributions on
preferred securities......................... 9,252 6,275
Provision for income taxes...................... 3,562 2,416
Distributions on preferred securities (net of
tax benefit of $128)......................... 205 ---
------ ------
Net income...................................... $5,485 $3,859
====== ======
Earnings per common share amounts:
Basic ....................................... $ .80 $ .68
Diluted ..................................... $ .76 $ .64
Weighted average number of shares:
Basic ....................................... 6,897,411 5,706,887
Diluted ..................................... 7,189,488 6,069,164
See accompanying notes to unaudited consolidated financial statements.
LITCHFIELD FINANCIAL CORPORATION
Consolidated Statement of Stockholders' Equity
(In thousands, except share amounts)
Unaudited
Accumulated
Additional Other
Common Paid In Comprehensive Retained
Stock Capital Income Earnings Total
----- ------- ------ -------- -----
Balance, December 31,1998.... $69 $58,040 $1,250 $22,735 $82,094
Issuance of 101,583
shares of common stock.... 1 1,681 --- --- 1,682
Retirement of 4,546
shares of treasury stock.. --- (77) --- --- (77)
Other comprehensive
income, net of tax....... --- --- 2,102 --- 2,102
Tax benefit from stock
options exercised........ --- --- --- 2 2
Net income................. --- --- --- 5,485 5,485
----- ------- ------ ------- --------
Balance, June 30, 1999. $70 $59,644 $3,352 $28,222 $91,288
===== ======= ====== ======= ========
See accompanying notes to unaudited consolidated financial statements.
LITCHFIELD FINANCIAL CORPORATION
Consolidated Statements of Comprehensive Income
(In thousands)
Unaudited
Three Months Ended June 30,
1999 1998
---- ----
Net income......................................... $3,207 $2,309
Unrealized gain on retained interests in loan
sales, net of tax expense of $299 and $128 for
1999 and 1998, respectively...................... 477 204
------ ------
Comprehensive income............................... $3,684 $2,513
====== ======
Six Months Ended June 30,
1999 1998
---- ----
Net income......................................... $5,485 $3,859
Unrealized gain on retained interests in loan
sales, net of tax expense of $1,316 and $113 for
1999 and 1998, respectively...................... 2,102 180
------ ------
Comprehensive income............................... $7,587 $4,039
====== ======
See accompanying notes to unaudited consolidated financial statements.
>
LITCHFIELD FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(In thousands)
Unaudited
Six Months Ended June 30,
1999 1998
---- ----
Cash flows from operating activities:
Net income................................... $ 5,485 $ 3,859
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of loans..................... (6,879) (5,679)
Amortization and depreciation............. 677 484
Amortization of retained interests in loan
sales.................................. 3,605 2,905
Provision for loan losses................. 1,000 810
Deferred income taxes..................... 698 1,327
Net changes in operating assets and
liabilities:
Restricted cash........................ 300 (3,976)
Loans held for sale.................... 4,757 3,879
Retained interests in loan sales....... (4,063) (872)
Dealer/developer reserves.............. (614) (211)
Net change in other assets and
liabilities......................... (1605) 1,723
-------- -------
Net cash provided by operating activities. 3,361 4,249
-------- -------
Cash flows from investing activities:
Net originations, purchases and principal
payments on other loans.................. (60,524) (73,114)
Other loans sold............................. 31,609 25,159
Collections on retained interests in loan
sales.................................... 4,182 1,866
Capital expenditures and other assets........ (1,669) (1,157)
Investments in affiliates.................... (5,618) (235)
------- -------
Net cash used in investing activities..... (32,020) (47,481)
------- -------
Cash flows from financing activities:
Net borrowings on lines of credit............ 12,991 22,424
Payments on term note........................ --- (1,493)
Retirement of long-term notes................ (691) (291)
Proceeds from issuance of preferred
securities................................ 26,200 ---
Purchase and retirement of treasury stock.... (77) ---
Net proceeds from issuance of common stock... 1,682 17,865
------- -------
Net cash provided by financing activities. 40,105 38,505
------- -------
Net increase (decrease) in cash and cash
equivalents.............................. 11,446 (4,727)
Cash and cash equivalents, beginning of period... 10,537 19,295
------- -------
Cash and cash equivalents, end of period......... $21,983 $14,568
======= =======
Supplemental Schedule on Noncash Financing and
Investing Activities:
Exchange of loans for retained interests in
loan sales............................... $ 1,717 $ 529
Transfers from loans to real estate acquired
through foreclosure...................... $ 2,616 $ 1,005
Supplemental Cash Flow Information:
Interest paid................................ $ 9,061 $ 6,053
Income taxes paid............................ $ 3,038 $ 239
See accompanying notes to unaudited consolidated financial statements.
FORM 10-Q
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
A. Basis of Presentation
The accompanying unaudited consolidated interim financial statements as
of June 30, 1999 and for the three and six month periods ended June 30, 1999
and 1998, have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal accruals) considered
necessary for a fair presentation have been included. Operating results for
the three and six month periods ended June 30, 1999, are not necessarily
indicative of the results expected for the year ending December 31, 1999.
For further information, refer to the consolidated financial statements and
notes thereto included in Litchfield Financial Corporation's annual report on
Form 10-K for the year ended December 31, 1998.
In June, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("Statement No. 133"), "Accounting
for Derivative Instruments and Hedging Activities." Statement No. 133, as
amended by Statement No. 137 issued in June 1999, is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000, with early
adoption permitted as of the beginning of any quarter after the date of
issuance. Statement No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivatives embedded in other
contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions
are met, a derivative may be specifically designated as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or
an unrecognized firm commitment, (b) a hedge of the exposure to variable cash
flows of a forecasted transaction, or (c) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a foreign-currency-denominated
forecasted transaction. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. The provisions of Statement No. 133 can not be applied
retroactively to financial statements of prior periods.
The Company plans to adopt Statement No. 133 in the fiscal quarter
beginning January 1, 2001. At the date of initial application, the Company
must recognize any freestanding derivative instruments in the balance sheet
as either assets or liabilities and measure them at fair value. The Company
shall also recognize offsetting gains and losses on hedged assets,
liabilities, and firm commitments by adjusting their carrying amounts at that
date as a cumulative effect of a change in accounting principal. Whether such
transition adjustment is reported in net income, other comprehensive income,
or allocated between both is based on the hedging relationships, if any, that
existed for that derivative instrument and were the basis for accounting
prior to the application of Statement No. 133. The Company is evaluating the
effect that the implementation of Statement No. 133 will have on its results
of operations and financial position.
B. Gain on Sale of Loans and Retained Interests in Loan Sales
Gains on sales of loans are based on the difference between the allocated
cost basis of the assets sold and the proceeds received, which includes the
fair value of any assets or liabilities that are newly created as a result of
the transaction. The previous carrying amount is allocated between the
assets sold and any retained interests based on their relative fair values at
the date of transfer. Retained interests in transferred assets
FORM 10Q
LITCHFIELD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
consist primarily of subordinate portions of the principal balance of
transferred assets and interest only strips, which are initially recorded at
fair value.
The Company estimates fair value using discounted cash flow analysis,
since quoted market prices are not readily available. The Company's analysis
incorporates estimates that market participants would be expected to use in
their estimates of future cash flows, including assumptions about interest
rates, defaults and prepayment rates. Estimates made are based on, among
other things, the Company's past experience with similar types of financial
assets. The interest rates paid to investors range from 6.5% to 9.0%. The
prepayment rates were 17.5% for Land Loan sales and 18.0% for VOI Loan
sales. For the Hypothecation Loan sales, the prepayment rates for the
underlying collateral used were 17.5% for Land Loans and 18.0% for VOI
Loans. The Company estimates default rates to be 1.9% on Land Loans, 3.0% on
VOI Loans and 0.5% on Hypothecation Loans. In valuing its retained
interests in loan sales, the Company selects discount rates commensurate with
the duration and risks embedded in the particular assets. Specifically, the
Company uses discount rates ranging from the investor pass-through rates (for
restricted cash) to the Baa corporate bond rate plus 325 basis points (for
interest only strips and retained principal certificates) to estimate the
fair value of its retained interests.
There is no servicing asset or liability arising from loan sales, because
the Company estimates that the benefits of servicing approximate the costs to
meet its servicing responsibilities.
On a quarterly basis, the Company assess the carrying value of retained
interests in loans sold by comparing actual and assumed interest, prepayment
and default rates on a disaggregate basis reflecting factors such as
origination dates and types of loans. The Company adjusts the carrying value
of retained interests accordingly.
Since its inception, the Company has sold $613,426,000 of loans at face
value ($492,960,000 through December 31, 1998). The principal amount
remaining on the loans sold was $275,388,000 at June 30, 1999 and
$238,132,000 at December 31, 1998. The Company guarantees, through
replacement or repayment, loans in default up to a specified percentage of
loans sold. Dealer/developer guaranteed loans are secured by repurchase or
replacement guarantees in addition to, in most instances, dealer/developer
reserves.
The Company's exposure to loss on loans sold in the event of
non-performance by the consumer, the dealer/developer on its guarantee, and
the determination that the collateral is of no value was $18,553,000 at June
30, 1999 ($12,750,000 at December 31, 1998). Such amounts have not been
discounted. The Company repurchased $211,000 and $26,000 of loans under the
recourse provisions of loan sales during the three months ended June 30, 1999
and 1998, respectively. Loans repurchased during the six months ended June
30, 1999 and 1998 were $403,000 and $144,000, respectively, and $491,000
during the year ended December 31, 1998. In addition, when the Company sells
loans through securitization programs, the Company commits either to replace
or repurchase any loans that do not conform to the requirements thereof in
the operative loan sale documents. As of June 30, 1999, $25,547,000 of the
Company's cash was restricted as credit enhancements in connection with
certain securitization programs. To date, the Company has participated
$17,055,000 of A&D and Other Loans ($10,505,000 through December 31, 1998).
The Company's Serviced Portfolio is geographically diversified with
collateral and consumers located in 48 and 50 states, respectively. The
Serviced Portfolio consists of the principal amount of loans serviced by or
on behalf of the Company, except loans participated without recourse to the
Company. At June 30, 1999, 14.5% and 11.2% of the Serviced Portfolio by
collateral location was located in Texas and Florida, respectively, and 16.0%
and 14.2% of the Serviced Portfolio by borrower location were located in
Florida and Texas, respectively. At December 31, 1998, 14.7%, 10.3%, 10.2%
of the Serviced Portfolio by collateral location were located in Texas,
Florida and California, respectively, and 16.1% and 14.4% of the Serviced
Portfolio by borrower location were located in Florida and Texas,
respectively. At June 30, 1999, no other state accounted for more than 10.0%
of the total by either collateral or borrower location.
C. Allowance for Loan Losses and Estimated Recourse Obligations
An analysis of the total allowances for all loan losses and recourse
obligations follows:
June 30, December 31,
1999 1998
-------- ----------
Allowance for losses on loans held for sale... $ 178,000 $ 549,000
Allowance for losses on other loans........... 2,740,000 2,477,000
Estimated recourse obligations on retained
interests in loan sales..................... 4,627,000 3,681,000
---------- ----------
$7,545,000 $6,707,000
========== ==========
D. Debt
The Company finances a portion of its liquidity needs with secured lines
of credit with eight participating institutions. Interest rates on the
lines of credit range from the Eurodollar or LIBOR rates plus 2.00% to the
prime rate plus 1.00%. The Company is not required to maintain compensating
balances or forward sales commitments under the terms of these lines of
credit.
The lines of credit mature as follows:
Date Amount
---------- -----------
October 1999 $ 40,000,000
March 2000 25,000,000
April 2000 65,000,000
May 2001 5,000,000
------------
$135,000,000
============
Financial data relating to the Company's secured lines of credit is as
follows:
June 30, December 31,
(Dollars in thousands) 1999 1998
-------- ----------
Lines of credit available .......... $135,000 $116,000
Borrowings outstanding at end
of period ......................... $ 62,012 $ 49,021
Weighted average interest rate
at end of period................... 7.2% 7.6%
Maximum borrowings outstanding
at any month end................... $ 83,500 $ 73,666
Average amount outstanding
during the period.................. $36,344 $ 37,485
Weighted average interest rate
during the period (determined by
dividing interest expense by
average borrowings)................ 7.2 7.9%
In July 1999, the Company renewed and amended a line of credit to
increase the line from $60,000,000 to $70,000,000 and extended the maturity
to April 2002.
As of June 30, 1999 and December 31, 1998, the Company had no unsecured
lines of credit.
The Company has an additional revolving line of credit and sale facility
as part of an asset backed commercial paper facility with a multi-seller
commercial paper issuer ("Conduit A"). In June 1998, the Company amended
the facility to increase the facility to $150,000,000, subject to certain
terms and conditions. The facility matures in June 2001.
In connection with the facility, the Company formed a wholly-owned
subsidiary, Litchfield Mortgage Securities Corporation 1994, to purchase
loans from the Company. In October 1998, Litchfield Mortgage Securities
Corporation 1994 was merged with and into Litchfield Mortgage Securities
Company 1994, LLC ("LMSC"). LMSC either pledges the loans on a revolving
line of credit with Conduit A or sells the loans to Conduit A. Conduit A
issues commercial paper or other indebtedness to fund the purchase or pledge
of loans from LMSC. Conduit A is not affiliated with the Company or its
affiliates. As of June 30, 1999 and December 31, 1998, the outstanding
balance of the sold or pledged loans securing this facility was $138,040,000
and $137,532,000, respectively. Outstanding borrowings at June 30, 1999 were
$66,000. There were no outstanding borrowings under the line of credit at
December 31, 1998. Interest is payable on the line of credit at an interest
rate based on certain commercial paper rates.
In March 1997, the Company closed an additional revolving line of credit
and sale facility of $25,000,000 with another multi-seller of commercial
paper conduit ("Conduit B"). The facility, which matures in March 2000, is
subject to certain terms and conditions, credit enhancement requirements and
loan eligibility criteria. The outstanding aggregate balance of the loans
pledged and sold under the facility at any time cannot exceed $25,000,000.
In connection with the facility, the Company formed a wholly-owned
subsidiary, Litchfield Capital Corporation 1996, to purchase loans from the
Company. In October 1998, Litchfield Capital Corporation 1996, was merged
with and into Litchfield Capital Company 1996, LLC ("LCC"). LCC either
pledges the loans on a revolving line of credit with Conduit B or sells the
loans to Conduit B. Conduit B issues commercial paper or other indebtedness
to fund the purchase or pledge of loans from LCC. Conduit B is not
affiliated with the Company or its affiliates. As of June 30, 1999 and
December 31, 1998, the outstanding aggregate balance of the loans sold or
pledged under the facility was $14,603,000 and $10,632,000, respectively.
There were no outstanding borrowings under the line of credit as of June 30,
1999 or December 31, 1998. Interest is payable on the line of credit at an
interest rate based on certain commercial paper rates.
The Company also finances a portion of its liquidity with long-term
debt. The following table shows the total long-term debt outstanding at June
30, 1999 and December 31, 1998:
June 30, December 31,
1999 1998
(Dollars in thousands)
9.3% Notes............... $ 20,000 $ 20,000
8.45% Notes due 2002..... 51,247 51,282
8.875% Notes due 2003.... 14,460 15,066
8.25% Notes due 2003..... 10,000 10,000
9.25% Notes due 2003..... 20,000 20,000
10% Notes due 2004....... 18,190 18,240
-------- --------
$133,897 $134,588
======== ========
The 9.3% Notes require principal reductions of $7,500,000, $6,000,000,
$6,000,000 and $500,000 in March 2001, 2002, 2003 and 2004, respectively.
Interest is payable semiannually in arrears.
The Company shall have the option to redeem all or any portion of the
long-term notes at predetermined redemption prices. The earliest call date
of each issuance is as follows:
9.3% Notes......................... April 1998
8.45% Notes due 2002............... November 1999
8.875% Notes due 2003.............. June 1996
8.25% Notes due 2003............... November 2000
9.25% Notes due 2003............... December 2000
10% Notes due 2004................. April 1998
E. Commitments
On April 14, 1999, the Company, Litchfield Capital Trust I ("Trust I")
and Litchfield Capital Trust II, subsidiaries of the Company and statutory
business trusts created under the Business Trust Act of the State of Delaware
(collectively, the Trusts), filed a Registration Statement on Form S-3, as
amended, with the Securities and Exchange Commission relating to the
registration of $100,000,000 in aggregate principal amount of (i) trust
preferred securities of the Trusts, (ii) junior subordinated debentures of
the Company, and (iii) guarantee of preferred securities of the Trusts by the
Company. In connection with this offering, the Trusts will sell the
preferred securities to the public and common securities to the Company, use
the proceeds from those sales to buy an equivalent principal amount of junior
subordinated debentures issued by the Company and distribute the interest
payments it receives on the junior subordinated debentures to the holders of
preferred and common securities.
On May 19, 1999, Trust I issued 2,500,000 of 10% Series A Trust Preferred
Securities ("Series A Preferred Securities") to the public for $25,000,000 and
used the proceeds to buy an equivalent amount of 10% Series A Junior
Subordinated Debentures due 2029 ("Series A Debentures") from the Company. On
June 8, 1999, the underwriters exercised their option to purchase an additional
120,000 10% Series A Preferred Securities for $1,200,000 and the proceeds were
also used to buy an equivalent amount of Series A Debentures from the company.
The sole assets of the Trust I are the Series A Debentures. The Company owns all
the securities of Trust I that possess general voting rights. The Trust's
obligation under the Series A Preferred Securities are fully and unconditionally
guaranteed by the Company. Trust I will redeem all of the outstanding Series A
Preferred Securities when the Series A Debentures are paid at maturity on June
30, 2029, or otherwise become due. The Company will have the right to redeem
100% of the principal plus accrued interest and unpaid interest on or after June
30, 2004. Interest is paid on the Series A Debentures quarterly, with
corresponding quarterly distributions to the holders of the Series A Preferred
Securities.
F. Derivative Financial Instruments Held for Purposes Other than Trading
The Company entered into two interest rate swap agreements to manage its
basis exposures. The swap agreements involve the payment of interest to the
counterparty at the prime rate on a notional amount of $110,000,000 and the
receipt of interest at the commercial paper rate plus a spread of 277 basis
points on a notional amount of $80,000,000 and the LIBOR rate plus a spread of
267 basis points on notional amount of $30,000,000. The swap agreements
expire in June 2000. There is no exchange of the notional amounts upon which
the interest payments are based.
The differential to be paid or received as interest rates change is
accrued and recognized as an adjustment to interest income from the excess
servicing asset. The related amount receivable from or payable to the
counterparty is included in other assets or other liabilities. The fair
values of the swap agreements are not recognized in the financial statements.
The Company intends to keep the contracts in effect until they mature in June
2000.
The Company entered into an interest rate cap agreement with a bank in
order to manage its exposure to certain increases in interest rates. The
interest rate cap entitles the Company to receive payments, based on an
amortizing notional amount, when commercial paper rates exceed 8.0%. If
payments were to be received as a result of the cap agreement, they would be
accrued as a reduction of interest expense. The notional amount outstanding
at June 30, 1999 was $3,371,000. This agreement expires in July 2005.
The Company does not use interest rate swap agreements or other
derivative instruments for speculation. The Company is exposed to credit
loss in the event of non-performance by the swap counterparty or the cap
provider.
FORM 10-Q
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-looking Statements
Except for the historical information contained or incorporated by
reference in this Form 10-Q, the matters discussed or incorporated by
reference herein are forward-looking statements. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
that may cause the actual results, performance or achievements of the Company,
or industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the risk factors set forth
under "Risk Factors" as well as the following: general economic and business
conditions; industry trends; changes in business strategy or development
plans; availability and quality of management; and availability, terms and
deployment of capital. Special attention should be paid to such
forward-looking statements including, but not limited to, statements relating
to (i) the Company's ability to execute its growth strategies and to realize
its growth objectives and (ii) the Company's ability to obtain sufficient
resources to finance its working capital needs and provide for its known
obligations. Refer to the Company's annual report on Form 10-K for the year
ended 1998 for a complete list of factors as discussed under "Risk Factors".
Overview
Litchfield Financial Corporation (the "Company") is a diversified finance
company that provides financing to creditworthy borrowers for assets not
typically financed by banks. The Company provides this financing by making
loans to businesses secured by consumer receivables or other assets and by
purchasing loans and tax lien certificates.
The Company purchases consumer loans (the "Purchased Loans")
consisting primarily of loans to purchasers of rural and vacation properties
("Land Loans") and vacation ownership interests popularly known as timeshare
interests ("VOI Loans"). The Company also provides financing to rural land
dealers, timeshare resort developers and other finance companies secured by
receivables ("Hypothecation Loans") and to dealers and developers for the
acquisition and development of rural land and timeshare resorts ("A&D
Loans"). In addition, the Company purchases other loans, such as consumer
home equity loans, mortgages and construction loans and tax lien
certificates, and provides financing to other businesses secured by
receivables or other assets ("Other Loans").
The Company extends Hypothecation Loans to land dealers, resort
developers and other finance companies secured by receivables. Hypothecation
Loans typically have advance rates of 75% to 90% of the current balance of
the pledged receivables and variable interest rates based on the prime rate
plus 1.5% to 4%.
The Company also purchases Land Loans and VOI Loans. Land Loans are
typically secured by one to twenty acre rural parcels. Land Loans are
secured by property located in 40 states, predominantly in the southern
United States. VOI Loans typically finance consumer purchases of ownership
interests in fully furnished vacation properties. VOI Loans are secured by
property located in 18 states, predominantly in California and Florida. The
Company requires most dealers or developers from whom it buys loans to
guarantee repayment or replacement of any loan in default. Ordinarily, the
Company retains a percentage of the purchase price as a reserve until the
loan is repaid.
The Company also makes A&D Loans to land dealers and resort developers
for the acquisition and development of rural land and timeshare resorts in
order to finance additional receivables generated by the A&D Loans. At the
time the Company makes A&D Loans, it typically receives an exclusive right to
purchase or finance the related consumer receivables generated by the sale of
the subdivided land or timeshare interests. A&D Loans typically have loan to
value ratios of 60% to 80% and variable interest rates based on the prime
rate plus 2% to 4%.
The principal sources of the Company's revenues are interest and fees on
loans, gains on sales of loans and servicing and other income. Gains on
sales of loans are based on the difference between the allocated cost basis
of the assets sold and the proceeds received, which includes the fair value
of any assets or liabilities that are newly created as a result of the
transaction. Because a significant portion of the Company's revenues is
comprised of gains realized upon sales of loans, the timing of such sales has
a significant effect on the Company's results of operations.
Results of Operations
The following table sets forth the percentage relationship to revenues,
unless otherwise indicated, of certain items included in the Company's
statements of income.
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Revenues
Interest and fees on loans..... 63.9% 60.7% 67.2% 63.0%
Gain on sale of loans.......... 32.1 34.6 28.3 31.7
Servicing and other income..... 4.0 4.7 4.5 5.3
----- ----- ----- -----
100.0 100.0 100.0 100.0
Expenses
Interest expense............... 35.6 37.0 38.4 37.4
Salaries and employee benefits. 10.8 11.5 11.1 12.7
Other operating expenses....... 8.0 9.2 8.4 10.4
Provision for loan losses...... 3.8 4.6 4.1 4.5
----- ----- ----- -----
58.2 62.3 62.0 65.0
Income before income taxes......... 41.8 37.7 38.0 35.0
Provision for income taxes......... 16.1 14.5 14.6 13.5
Distributions on preferred
securities, net................... 1.5 --- 0.9 ---
----- ----- ----- -----
Net income......................... 24.2% 23.2% 22.5% 21.5%
===== ===== ===== =====
Revenues increased 33.1% and 35.8% to $13,272,000 and $24,347,000 for the
three and six months ended June 30, 1999, from $9,973,000 and $17,926,000 for
the same periods in 1998. Net income for the three and six months ended June
30, 1999 increased 38.9% and 42.1% to $3,207,000 and $5,485,000 compared to
$2,309,000 and $3,859,000 for the same periods in 1998. Net income as a
percentage of revenues was 24.2% and 22.5% for the three and six months ended
June 30, 1999 compared to 23.2% and 21.5% for the three and six months ended
June 30, 1998. Loan purchases and originations grew 24.5% and 33.0% to
$118,973,000 and $216,964,000 for the three and six months ended June 30,
1999 from $95,585,000 and $163,078,000 for the same periods in 1998. The
average Serviced Portfolio increased 45.7% to $498,853,000 at June 30, 1999
from $342,422,000 at June 30, 1998.
Interest and fees on loans increased 40.0% and 45.0% to $8,477,000 and
$16,364,000 for the three and six months ended June 30, 1999 from $6,055,000 and
$11,288,000 for the same periods in 1998, primarily as the result of the higher
average balance of other loans during the 1999 period, which was only partially
offset by a decrease in the average rate. The average rate earned on the
Serviced Portfolio decreased to 11.3% at June 30, 1999 from 12.2% at June 30,
1998, primarily due to the reduction in the prime rate and the effect of the
growth in Hypothecation Loans as a percentage of the portfolio. Hypothecation
Loan yields are usually less than Land Loan or VOI Loan yields, but servicing
costs and loan losses are generally less as well.
Gain on the sale of loans increased 23.5% and 21.1% to $4,262,000 and
$6,879,000 for the three and six months ended June 30, 1999 from $3,452,000
and $5,679,000 in the same periods in 1998. The volume of loans sold
increased 34.2% and 74.9% to $67,595,000 and $120,466,000 for the three and
six months ended June 30, 1999 from $50,380,000 and $68,882,000 during the
three and six months ended June 30, 1998. The increase in the gain on sale
of loans was not proportionate to the increase in the volume of loans sold
primarily due to variations in the mix of loans sold. The yield on
Hypothecation and Other loan sales is generally lower than the yield on Land
and VOI loan sales. Land and VOI loan sales were $34,494,000 and $50,682,000
for the three and six months ended June 30, 1998 compared to $14,665,000 and
$33,167,000 for the same periods in 1998. Hypothecation and Other loans sold
were $33,101,000 and $69,784,000 for the three and six months ended June 30,
1999 compared to $35,715,000 for the three and six months ended June 30,
1998. Approximately $17,508,000 of loan sales in the three months ended June
30, 1999 consisted of loans that were repurchased from other facilities due
to clean up calls and other factors which made it more economical to
repurchase and resell loans. As a result of the repurchase, there was
recapture of unamortized gain, which reduced the overall yield on these loan
sales.
Servicing and other income increased 14.4% and 15.1% to $533,000 and
$1,104,000 for the three and six months ended June 30, 1999, from $466,000
and $959,000 for the same periods in 1998 largely due to the increase in the
other fee income and prepayment penalties from Hypothecation Loans. Although
loans serviced for others increased 25.3% to $275,388,000 as of June 30, 1999
from $219,809,000 at June 30, 1998, servicing income remained relatively
constant due to an increase in Hypothecation Loans serviced for others and a
decrease in the average servicing fee per loan.
Interest expense increased 27.8% and 39.7% to $4,724,000 and $9,352,000
during the three and six months ended June 30, 1999 from $3,695,000 and
$6,692,000 for the same periods in 1998. The increase in interest expense
primarily reflects an increase in average borrowings which was only partially
offset by lower rates. During the three and six months ended June 30, 1999,
borrowings averaged $212,032,000 and $210,169,000 at an average rate of 8.3%
and 8.3% respectively, as compared to $158,531,000 and $139,503,000 at an
average rate of 8.7% and 8.8% during the same periods in 1998. Interest
expense includes the amortization of deferred debt issuance costs.
Salaries and employee benefits increased 25.4% and 18.6% to $1,438,000
and $2,704,000 for the three and six months ended June 30, 1999 from
$1,147,000 and $2,280,000 for the same periods in 1998 because of an increase
in the number of employees in 1999, primarily related to bringing customer
service and collections in house, and to a lesser extent, an increase in
salaries. Personnel costs as a percentage of revenues decreased to 10.8% and
11.1% for the three and six months ended June 30, 1999 compared to 11.5% and
12.7% for the same periods in 1998. Also, as a percentage of the Serviced
Portfolio, personnel costs remained relatively constant at 1.2% and 1.1% for
the three and six months ended June 30, 1999 compared to 1.2% for the same
periods in 1998. Total salaries and employee benefits plus other operating
expenses as a percentage of revenues decreased to 18.8% and 19.5% for the
three and six months ended June 30, 1999 from 20.7% and 23.1% for the same
periods in 1998.
Other operating expenses increased 15.8% and 9.1% to $1,061,000 and
$2,039,000 for the three and six months ended June 30, 1999 from $916,000 and
$1,869,000 for the same periods in 1998. Other operating expenses increased
due to the growth in the Serviced Portfolio that was only partially offset by
the decrease in third party servicing expenses related to bringing customer
service and collections in-house. As a percentage of revenues, other
operating expenses decreased to 8.0% and 8.4% for the three and six months
ended June 30, 1999 compared to 9.2% and 10.4% for the corresponding periods
in 1998. As a percentage of the Serviced Portfolio, other operating expenses
decreased to 0.9% and 0.8% for the three and six months ended June 30, 1999
from 1.0% and 1.1% for the same periods in 1998.
During the three and six months ended June 30, 1999, the provision for
loan losses increased 8.7% and 23.5% to $500,000 and $1,000,000 from $460,000
and $810,000 for the same periods in 1998 primarily due to the growth of the
Serviced Portfolio.
Liquidity and Capital Resources
The Company's business requires continued access to short and long-term
sources of debt financing and equity capital. The Company's principal cash
requirements arise from loan originations, repayment of debt on maturity and
payments of operating and interest expenses. The Company's primary sources
of liquidity are loan sales, short-term borrowings under secured lines of
credit and long-term debt and equity offerings.
Since its inception, the Company has sold $613,426,000 of loans at face
value ($492,960,000 through December 31, 1998). The principal amount
remaining on the loans sold was $275,388,000 at June 30, 1999 and
$238,132,000 at December 31, 1998. In connection with certain loan sales,
the Company commits to repurchase from investors any loans that become 90
days or more past due. This obligation is subject to various terms and
conditions, including, in some instances, a limitation on the amount of loans
that may be required to be repurchased. There were approximately $18,553,000
of loans at June 30, 1999 which the Company could be required to repurchase
in the future should such loans become 90 days or more past due. The Company
repurchased $211,000 and $403,000 as compared to $26,000 and $144,000 of such
loans under the recourse provisions of loan sales during the three and six
months ended June 30, 1999 and 1998, respectively. As of June 30, 1999,
$25,547,000 of the Company's cash was restricted as credit enhancement for
certain securitization programs. To date, the Company has participated
$17,055,000 of A&D and Other Loans ($10,505,000 through December 31, 1998).
The Company funds its loan purchases in part with borrowings under
various lines of credit. Lines are paid down when the Company receives the
proceeds from the sale of the loans or when cash is otherwise available.
These lines of credit totaled $135,000,000 and $116,000,000 at June 30, 1999
and December 31, 1998, respectively. Outstanding borrowings on these lines
of credit were $62,012,000 at June 30, 1999. Interest rates on these lines
of credit range from the Eurodollar or LIBOR rate plus 2.00% to the prime
rate plus 1.00%. The Company is not required to maintain compensating
balances or forward sales commitments under the terms of these lines of
credit. In July 1999, the Company renewed and amended a line of credit to
increase the line from $60,000,000 to $70,000,000 and extend the maturity to
April 2002.
The Company also finances its loan purchases with two revolving line of
credit and sale facilities as part of asset backed commercial paper
facilities with multi-seller commercial paper issuers. Such facilities
totaled $175,000,000 at June 30, 1999 and December 31, 1998, respectively.
As of June 30, 1999 and December 31, 1998, the outstanding balances of loans
sold or pledged under these facilities were $152,643,000 and $148,164,000,
respectively. Outstanding borrowings under these lines of credit at June
30, 1999 were $66,000. There were no outstanding borrowings under these line
of credit at December 31, 1998. Interest is payable on these lines of
credit based on certain commercial paper rates.
In May 1999, Litchfield Capital Trust I issued 2,500,000 shares of 10%
Series A Trust Preferred Securities ("Series A Preferred Securities") at $10 per
share. The proceeds of the offering were $25,000,000 and were used to buy an
equivalent amount of 10% Series A Junior Subordinated Debentures ("Series A
Debentures") due 2029 issued by the Company. In connection with the
underwriters' option to purchase additional shares to cover over-allotments,
Litchfield Capital Trust I issued an additional 120,000 10% Series A Preferred
Securities in June 1999. The proceeds of these shares totaled $1,200,000 and
were also used to buy an equivalent amount of Series A Debentures issued by the
Company. The Company will have the right to redeem 100% of the principal and
accrued interest and unpaid interest on or after June 30, 2004, or otherwise
become due. Interest is paid on the Series A Debentures quarterly, with
corresponding quarterly distributions to the holders of the Series A Preferred
Securities.
In June 1998, the Company issued 1,000,000 shares of common stock at $19
per share. The net proceeds of the offering were $17,717,000 and were used
to pay down certain lines of credit. In connection with the underwriters'
option to purchase additional shares to cover over-allotments, the Company
issued an additional 166,500 shares in July 1998. Net proceeds of these
shares totaled $2,990,000 and were also used to pay down certain lines of
credit.
The Company also finances its liquidity needs with long-term debt.
Long-term debt totaled $133,897,000 at June 30, 1999 and $134,588,000 at
December 31, 1998.
The Company entered into two interest rate swap agreements. The swap
agreements involve the payment of interest to the counterparty at the prime
rate on a notional amount of $110,000,000 and the receipt of interest at the
commercial paper rate plus a spread and the LIBOR rate plus a spread on
notional amounts of $80,000,000 and $30,000,000, respectively. The swap
agreements expire in June 2000. There is no exchange of the notional amounts
upon which interest payments are based.
The Company entered into an interest rate cap agreement with a bank in
order to manage its exposure to certain increases in interest rates. The
interest rate cap entitles the Company to receive an amount, based on an
amortizing notional amount, which at June 30, 1999 was $3,371,000, when
commercial paper rates exceed 8%. This agreement expires in July 2005.
Historically, the Company has not required major capital expenditures to
support its operations.
Acquisitions
In the third quarter of 1998, the Company acquired 25% of Land Finance
Company ("Land Finance"), a broker specializing in the land business, located in
Atlanta, Georgia. At the time of the transaction, the Company received the
right to acquire additional shares of Land Finance at future dates. On April 1,
1999, the Company acquired the remaining 75% of Land Finance. All of Land
Finance's employees became employees of the Company as of that date. The Company
has accounted for this acquisition by the purchase method. The total purchase
price was $275,000, consisting of the issuance of 9,092 shares of common stock
with a fair value of $155,000 and $120,000 of expenses and assumed liabilities.
The goodwill of $225,000, resulting from the purchase, is being amortized on a
straight line basis over a period of 10 years. The results of operation of Land
Finance have been included in the Company's income statement beginning April 1,
1999.
On June 17, 1999, the Company acquired 100% of Ironwood Acceptance Company,
L.L.C., ("Ironwood LLC"), located in Scottsdale, Arizona. Ironwood LLC
purchases, services and liquidates tax lien certificates. During the fiscal
years 1997 and 1998, the Company provided Ironwood LLC with a Hypothecation Loan
for the purchase of tax lien certificates. All of Ironwood LLC's employees
became employees of the Company following the acquisition. The Company has
accounted for this acquisition by the purchase method. The total purchase price
was $15,833,000, consisting of the issuance of 91,665 shares of common stock
with a fair value of $1,519,000 and $13,523,000 of expenses and assumed
liabilities. The goodwill of $2,938,000, resulting from the purchase, is being
amortized on a straight line basis over a period of 20 years. The results of
operations of Ironwood have been included in the Company's income statement from
June 17, 1999.
Credit Quality and Allowances for Loan Losses
The Company maintains allowances for loan losses and recourse obligations
on retained interests in loan sales at levels which, in the opinion of
management, provide adequately for current and estimated future losses on
such assets. Past-due loans (loans 31 days or more past due which are not
covered by dealer/developer reserves or guarantees) as a percentage of the
Serviced Portfolio as of June 30, 1999, increased to 1.04% from .95% at
December 31, 1998. Management evaluates the adequacy of the allowances on a
quarterly basis by examining current delinquencies, the characteristics of
the accounts, the value of the underlying collateral, and general economic
conditions and trends. Management also evaluates the extent to which
dealer/developer reserves and guarantees can be expected to absorb loan
losses. When the Company does not receive guarantees on loan portfolios
purchased, it adjusts its purchase price to reflect anticipated losses and
its required yield. This purchase adjustment is recorded as an increase in
the allowance for loan losses and is used only for the respective portfolio.
A provision for loan losses is recorded in an amount deemed sufficient by
management to maintain the allowances at adequate levels. Total allowances
for loan losses and recourse obligations on retained interests in loan sales
increased to $7,545,000 at June 30, 1999 compared to $6,707,000 at December
31, 1998. The allowance ratio (the allowances for loan losses divided by the
amount of the Serviced Portfolio) at June 30, 1999 remained relatively
constant at 1.43% as compared to 1.44% at December 31, 1998.
As part of the Company's financing of Purchased Loans, arrangements are
entered into with dealers and resort developers, whereby reserves are
established to protect the Company from potential losses associated with such
loans. As part of the Company's agreement with the dealers and resort
developers, a portion of the amount payable to each dealer and resort
developer for a Purchased Loan is retained by the Company and is available to
the Company to absorb loan losses for those loans. The Company negotiates
the amount of the reserves with the dealers and developers based upon various
criteria, two of which are the financial strength of the dealer or developer
and credit risk associated with the loans being purchased. Dealer/developer
reserves amounted to $9,365,000 and $9,979,000 at June 30, 1999 and December
31, 1998, respectively. The Company generally returns any excess reserves to
the dealer/developer on a quarterly basis as the related loans are repaid by
borrowers.
Year 2000 Compliance
Many currently installed computer systems and software products are
coded to accept only two-digit entries in the date code field and cannot
distinguish 21st century dates from 20th century dates. As a result, many
companies' software and computer systems may need to be upgraded or replaced
in order to comply with "Year 2000" requirements.
State of Readiness. The year 2000 readiness process consists of the
following phases: (i) identification of all IT Systems and non-IT Systems;
(ii) assessment of repair or replacement requirements; (iii) repair or
replacement; (iv) testing; (v) implementation; and (vi) creation of
contingency plans in the event of year 2000 failures. The Company has
evaluated the year 2000 readiness of the information technology systems used
in its operations ("IT Systems") and it non-IT Systems, such as building
security, voice mail and other systems.
The Company has tested all computing equipment and deemed it to be Year
2000 ready. All non-computing equipment and computer systems are deemed Year
2000 ready based on manufacturer's warranty. The Company uses a third party
servicer to perform some functions, such as receipt and posting of loan
payments and other loan related activity. The third party servicer has
represented to the Company that its systems are year 2000 compliant.
In addition, the Company relies upon various vendors, governmental
agencies, utility companies, telecommunication service companies, delivery
service companies and other service providers who are outside of its
control. There is no assurance that such parties will not suffer a year 2000
business disruption, which could have a material adverse effect on the
Company's financial condition and results of operations. The Company has
inquired as to the Year 2000 readiness of vendors and customers with whom the
company has material relationships. We have requested that our business
partners address significant risks by July 1, 1999, and plan to replace any
material non-compliant business partners by October 1, 1999.
Costs. To date, the Company has not incurred any material expenditures
in connection with identifying or evaluating year 2000 compliance issues.
Most of its expenses have related to the opportunity cost of time spent by
employees of the Company evaluating year 2000 compliance matters generally.
The Company believes that internally generated funds or available cash should
be sufficient to cover the projected costs associated with any modifications
to existing software to make it year 2000 compliant. However, no assurances
can be given that such modifications can be made in a timely and cost
effective manner. Failure to make timely modifications could, in a worse
case scenario, result in the inability to process loans and loan related data
and could have a material adverse effect on the Company. At this time, the
Company does not possess all the information necessary to estimate the
potential impact of year 2000 compliance issues relating to its other
IT-Systems, non-IT Systems, its vendors, its customers and other parties.
Such impact, including the effect of a year 2000 business disruption, could
have a material adverse effect on the Company's financial condition and
results of operations.
Contingency Plan. The Company is in the process of developing a
comprehensive disaster recovery plan, which will be activated should a Year
2000 issue arise.
Inflation
Inflation has not had a significant effect on the Company's operating
results to date.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Exposure to Market Risk
The Company performs an interest rate sensitivity analysis to identify the
potential interest rate exposures. Specific interest rate risks analyzed
include asset/liability mismatches, basis risk, risk caused by floors and
caps, duration mismatches and re-pricing lag in response to changes in a base
index.
A simulated earnings model is used to identify the impact of specific
interest rate movements on earnings per share for the next 12 months. The
model incorporates management's expectations about future origination levels,
origination mix, amortization rates, prepayment speeds, timing of loan sales,
timing of capital issues, extensions and/or increases in lines of credit,
pricing of originations and cost of debt and lines of credit.
The Company's objective in managing the interest rate exposures is to
maintain, at a reasonable level, the impact on earnings per share of an
immediate and sustained change of 100 basis points in interest rates in either
direction. The Company periodically reviews the interest rate risk and
various options such as capital structuring, product pricing, hedging and
spread analysis to manage the interest rate risk at reasonable levels.
As of June 30, 1999, the Company had the following estimated sensitivity
profile:
Interest rate changes (in basis points) 100 (100)
Impact on earnings per share ($0.01) $0.05
Impact on interest income and pre-tax earnings ($111,000) $635,000
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(Dollars in thousands, except per share data)
Six Months Ended
Year Ended December 31, June 30,
Statement of Income Data (1): 1998 1997 1996 1995 1994 1999 1998
------ ------ ------ ------ ------ ------ ------
Revenues:
Interest and fees on loans............. $ 25,736 $ 19,374 $14,789 $ 11,392 $ 5,669 $16,364 $11,288
Gain on sale of loans.................. 10,691 8,564 7,331 5,161 4,847 6,879 5,679
Servicing and other income............. 2,379 1,753 1,576 908 459 1,104 959
------ ------ ------ ------ ----- ------ -----
Total revenues....................... 38,806 29,691 23,696 17,461 10,975 24,347 17,926
------ ------ ------ ------ ----- ------ ------
Expenses:
Interest expense....................... 14,265 10,675 7,197 6,138 3,158 9,352 6,692
Salaries and employee benefits......... 4,806 3,399 2,824 2,798 1,776 2,704 2,280
Other operating expenses............... 3,834 3,480 3,147 2,120 1,164 2,039 1,869
Provision for loan losses.............. 1,532 1,400 1,954 890 559 1,000 810
------ ------ ------ ------ ------ ------ ------
Total expenses....................... 24,437 18,954 15,122 11,946 6,657 15,095 11,651
------ ------ ------ ------ ------ ------ ------
Income before income taxes and
distributions on preferred securities.... 14,369 10,737 8,574 5,515 4,318 9,252 6,275
Provision for income taxes................ 5,537 4,134 3,301 2,066 1,619 3,562 2,416
Distributions on preferred securities,net. --- --- --- --- --- 205 ---
------ ------ ----- ------ ------ ------ ------
Income before extraordinary item.......... 8,832 6,603 5,273 3,449 2,699 5,485 3,859
Extraordinary item (2).................... (77) (220) --- --- (126) --- ---
------ ------ ------ ------ ------ ------ ------
Net income............................ $ 8,755 $6,383 $5,273 $3,449 $2,573 $5,485 $3,859
====== ====== ====== ====== ====== ====== ======
Basic per common share amounts:
Income before extraordinary item........ $ 1.41 $ 1.19 $ .97 $ .80 $ .66 $ .80 $ .68
Extraordinary item...................... (.01) (.04) --- --- (.03) --- ---
------ ------ ------ ------ ------ ------ ------
Net income per share..................... $ 1.40 $ 1.15 $ .97 $ .80 $ .63 $ .80 $ .68
====== ====== ====== ====== ====== ====== ======
Basic weighted average number of shares
outstanding............................. 6,273,638 5,572,465 5,441,636 4,315,469 4,116,684 6,897,411 5,706,887
Diluted per common share amounts:
Income before extraordinary item........ $ 1.34 $ 1.12 $ .93 $ .76 $ .63 $ .76 $ .64
Extraordinary item...................... (.01) (.04) --- --- (.03) --- ---
------ ------ ------ ------ ------ ------ ------
Net income per share.................... $ 1.33 $ 1.08 $ .93 $ .76 $ .60 $ .76 $ .64
====== ====== ====== ====== ====== ====== ======
Diluted weighted average number of shares
outstanding............................. 6,604,367 5,909,432 5,682,152 4,524,607 4,282,884 7,189,488 6,069,164
Cash dividends declared per
Common share............................ $ .07 $ .06 $ .05 $ .04 $ .03 $ --- $ ---
Other Statement of Income Data:
Income before extraordinary item as
a percentage of revenues................. 22.8% 22.2% 22.3% 19.8% 24.6% 22.5% 21.5%
Ratio of EBITDA to interest expense (3)... 2.13 2.17 2.38 2.05 2.64 2.10 2.13
Ratio of earnings to fixed charges (4).... 2.01 2.01 2.19 1.90 2.37 2.02 1.94
Return on average assets (5).............. 3.7% 3.8% 4.0% 3.7% 4.6% 3.4% 3.6%
Return on average equity (5).............. 13.2% 14.1% 13.3% 16.6% 17.2% 12.9% 13.8%
__________
(1) Certain amounts in the 1994 through 1996 financial information have been
restated to conform to the 1997 through 1999 presentation.
(2) Reflects loss on early extinguishment of a portion of the 1992 Notes (as
defined herein), net of applicable tax benefit of $76,000, for 1994, of the
remainder of the 1992 Notes, net of applicable tax benefit of $138,000, for
1997, and of the term note payable, net applicable tax benefit of $48,000, for
1998.
(3) The ratio of EBITDA to interest expense is required to be calculated for
the twelve month period immediately preceding each calculation date, pursuant to
the terms of the indentures to which the Company is subject. EBITDA is defined
as earnings before deduction of taxes, depreciation, amortization of debt costs,
and interest expense (but after deduction for any extraordinary item).
(4) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before income taxes and extraordinary items and fixed
charges. Fixed charges consist of interest charges and the amortization of debt
expense.
(5) Calculations are based on income before extraordinary item.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION - (Continued)
(Dollars in thousands, except per share data)
December 31, June. 30,
Balance Sheet Data (6): 1998 1997 1996 1995 1994 1999
---- ---- ---- ---- ---- ----
Total assets..........$293,882 186,790 152,689 112,459 63,487 $340,589
Loans held for sale(7) 19,750 16,366 12,260 14,380 11,094 13,351
Other loans (7)....... 191,292 86,307 79,996 33,613 15,790 219,944
Retained interests in
loan sales (7)........ 28,883 30,299 28,912 22,594 11,996 32,603
Secured debt.......... 49,021 5,387 43,727 9,836 5,823 62,012
Unsecured debt........ 134,588 105,347 46,995 47,401 29,896 133,897
Stockholders' equity.. 82,094 52,071 42,448 37,396 16,610 91,288
Six Months
Ended
Year Ended December 31, June 30,
Other Financial Data: 1998 1997 1996 1995 1994 1999
---- ---- ---- ---- ---- ----
Loans purchased and
originated (8).......$375,292 $184,660 $133,750 $121,046 $ 59,798 $216,964
Loans sold (8)........ 144,762 98,747 54,936 65,115 40,116 120,466
Loans participated (8) 3,569 6,936 --- --- --- 6,550
Serviced Portfolio (9) 466,912 304,102 242,445 176,650 105,013 529,198
Loans serviced for
others............... 238,132 179,790 129,619 111,117 72,731 275,388
Dealer/developer
reserves............. 9,979 10,655 10,628 9,644 6,575 9,365
Allowance for loan
losses (10).......... 6,707 5,877 4,528 3,715 1,264 7,545
Allowance ratio (11).. 1.44% 1.93% 1.87% 2.10% 1.20% 1.43%
Delinquency ratio(12). 0.95% 1.20% 1.34% 1.73% .93% 1.04%
Net charge-off ratio
(8)(13).............. .58% .74% .94% .67% .38% .46%
Non-performing asset
ratio (14)............ .84% 1.03% 1.57% 1.35% 1.02% 1.07%
- --------------------------------------------------------------------------
(6) In 1997 the Company adopted Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Consequently, certain amounts included in
the 1994 through 1996 financial statements have been reclassified to
conform with the 1997 through 1999 presentations: "Subordinated pass
through certificates held to maturity," "Excess servicing asset" and
"Allowance for loans sold" have been reclassified as "Retained interests
in loan sales." In addition, "Loans held for investment" have been
reclassified as "Other loans."
(7) Amount indicated is net of allowance for losses and recourse obligation on
retained interests in loan sales.
(8) During the relevant period.
(9) The Serviced Portfolio consists of the principal amount of loans serviced
by or on behalf of the Company, except loans participated without recourse
to the Company.
(10) The allowance for loan losses includes estimated recourse obligations
for loans sold. See Note C to financial statements.
(11) The allowance ratio is the allowances for loan losses divided by the
amount of the Serviced Portfolio.
(12) The delinquency ratio is the amount of delinquent loans divided by the
amount of the Serviced Portfolio. Delinquent loans are those which are 31
days or more past due which are not covered by dealer/developer reserves
or guarantees and not included in other real estate owned.
(13) The net charge-off ratio is determined by dividing the amount of net
charge-offs for the period by the average Serviced Portfolio for the
period. The June 30, 1999 amount is calculated on an annualized basis.
(14) The non-performing asset ratio is determined by dividing the sum of the
amount of those loans which are 91 days or more past due and other real
estate owned by the amount of the Serviced Portfolio.
BUSINESS
Overview
Litchfield Financial Corporation (the "Company") is a diversified finance
company that provides financing to creditworthy borrowers for assets not
typically financed by banks. The Company provides this financing by making
loans to businesses secured by consumer receivables or other assets and by
purchasing consumer loans.
The Company purchases consumer loans (the "Purchased Loans")
consisting primarily of loans to purchasers of rural and vacation properties
("Land Loans") and vacation ownership interests popularly known as timeshare
interests ("VOI Loans"). The Company also provides financing to rural land
dealers, timeshare resort developers and other finance companies secured by
receivables ("Hypothecation Loans") and to dealers and developers for the
acquisition and development of rural land and timeshare resorts ("A&D
Loans"). In addition, the Company purchases other loans, such as consumer
home equity loans, mortgages and construction loans and tax lien
certificates, and provides financing to other businesses secured by
receivables or other assets ("Other Loans").
The principal sources of the Company's revenues are interest and fees on
loans, gains on sales of loans and servicing and other income. Gains on
sales of loans are based on the difference between the allocated cost basis
of the assets sold and the proceeds received, which includes the fair value
of any assets or liabilities that are newly created as a result of the
transaction. Because a significant portion of the Company's revenues is
comprised of gains realized upon sales of loans, the timing of such sales has
a significant effect on the Company's results of operations.
Characteristics of the Serviced Portfolio, Loan Purchases and Originations
The following table shows the growth in the diversity of the Serviced
Portfolio from primarily Purchased Loans to a mix of Purchased Loans,
Hypothecation Loans, A&D Loans and Other Loans:
December 31, June 30,
1998 1997 1996 1995 1994 1999
---- ---- ---- ---- ---- ----
Purchased Loans............ 38.4% 56.6% 67.1% 81.6% 85.3% 35.8%
Hypothecation Loans........ 35.2 26.9 20.7 12.5 9.0 36.4
A&D Loans.................. 11.2 13.7 8.7 3.1 3.3 12.2
Other Loans................ 15.2 2.8 3.5 2.8 2.4 15.6
----- ----- ----- ----- ----- -----
Total............ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
The following table shows the growth in the diversity of the Company's
originations from primarily Purchased Loans to a mix of Purchased Loans,
Hypothecation Loans, A&D Loans and Other Loans:
Year Ended December 31, Six Months Ended
June 30,
1998 1997 1996 1995 1994 1999 1998
---- ---- ---- ---- ---- ---- ----
Purchased Loans..... 14.9% 30.3% 49.9% 71.4% 67.6% 13.6% 19.8%
Hypothecation Loans. 48.6 37.1 29.6 20.9 22.2 54.1 40.7
A&D Loans........... 10.2 24.0 14.4 3.1 6.0 13.4 13.2
Other Loans......... 26.3 8.6 6.1 4.6 4.2 18.9 26.3
----- ----- ----- ----- ----- ----- -----
Total.......... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== ===== =====
(1) Purchased Loans
The Company provides indirect financing to consumers through a large
number of experienced land dealers and resort developers from which it
regularly purchases Land and VOI Loans. The land dealers and resort
developers make loans to consumers. The Company then purchases such loans
from the land dealers and resort developers on an individually approved basis
in accordance with its credit guidelines.
Each land dealer and resort developer from whom the Company purchases
loans is interviewed by the Company and approved by its credit committee.
Management evaluates each land dealer's and resort developer's experience,
financial statements and credit references and inspects a substantial portion
of the land dealer's and resort developer's inventory of land or VOIs prior
to approval of loan purchases.
In order to enhance the creditworthiness of loans purchased from land
dealers and resort developers, the Company typically requires land dealers
and resort developers to guarantee payment of the loans and typically retains
a portion of the amount payable by the Company to each land dealer and resort
developer on purchase of the loan. The retained portion, or reserve, is
released to the land dealer or resort developer as the related loan is repaid.
Prior to purchasing Land or VOI Loans, the Company evaluates the credit
and payment history of each borrower in accordance with its underwriting
guidelines, performs borrower interviews on a sample of loans, reviews the
documentation supporting the loans for completeness and obtains an
appropriate opinion from local legal counsel. The Company purchases only
those loans which meet its credit standards.
The Company also purchases portfolios of seasoned loans primarily from
land dealers and resort developers. The land dealers or resort developers
generally guarantee the loans sold and the Company generally withholds a
reserve as described above. Management believes that the portfolio
acquisition program is attractive to land dealers and resort developers
because it provides them with liquidity to purchase additional inventory.
The Company also purchases portfolios of seasoned loans from financial
institutions and others. Sellers generally do not guarantee such loans, but
estimated loan losses are considered in establishing the purchase price.
In evaluating such seasoned portfolios, the Company conducts its normal
review of the borrower's documentation, payment history and underlying
collateral. However, the Company may not always be able to reject individual
loans.
The Company's portfolio of Purchased Loans is secured by property located
in 41 states.
Principal Amount of Loans
December 31 June 30,
1998 1997 1996 1995 1994 1999
---- ---- ---- ---- ---- ----
Southwest................ 32% 30% 26% 16% 19% 35%
South.................... 30 31 31 31 37 29
West..................... 19 17 20 20 3 18
Mid-Atlantic............. 8 10 10 16 16 8
Northeast................ 11 12 13 17 25 10
---- ---- ---- ---- ---- ----
Total............... 100% 100% 100% 100% 100% 100%
==== ==== ==== ==== ==== ====
a. Land Loans
Dealers from whom the Company purchases Land Loans are typically
closely-held firms with annual revenues of less than $3.0 million. Dealers
generally purchase large rural tracts (generally 100 or more acres) from
farmers or other owners and subdivide the property into one to twenty acre
parcels for resale to consumers. Generally the subdivided property is not
developed significantly beyond the provision of graded access roads. In
recreational areas, sales are made primarily to urban consumers who wish to
use the property for a vacation or retirement home or for recreational
purposes such as fishing, hunting or camping. In other rural areas, sales are
more commonly made to persons who will locate a manufactured home on the
parcel. During the six months ended June 30, 1999, the Company acquired
approximately $31.7 million of Land Loans. The aggregate principal amount of
Land Loans purchased from individual dealers during the six months ended June
30, 1999 varied from a low of approximately $6,300 to a high of approximately
$1.4 million. As of June 30, 1999 and December 31, 1998, the five largest
dealers accounted for approximately 17.7% and 20.6%, respectively, of the
principal amount of the Land Loans in the Serviced Portfolio. No single
dealer accounted for more than 4.7% and 5.4% at June 30, 1999 and at December
31, 1998, respectively.
As of June 30, 1999 and December 31, 1998, 32.8% and 34.3%, respectively,
of the Serviced Portfolio consisted of Land Loans. The average principal
balance of such Land Loans were approximately $13,500 and $13,100 at June 30,
1999 and December 31, 1998, respectively. The following table sets forth as
of June 30, 1999, the distribution of Land Loans in the Company's Serviced
Portfolio:
Percentage of Percentage of
Principal Principal Number of Number of
Principal Balance Amount Amount Loans Loans
- ----------------- ------------ --------- ----------- ---------
Loans
Less than $10,000........$ 29,948,000 17.3% 5,720 44.6%
$10,000-$19,999.......... 62,478,000 36.0 4,374 34.1
$20,000 and greater...... 80,848,000 46.7 2,737 21.3
------------ ------ ------ -----
Total...............$173,274,000 100.0% 12,831 100.0%
============ ===== ====== =====
As of June 30, 1999 and December 31, 1998, the weighted average interest
rate of the Land Loans included in the Company's Serviced Portfolio was
12.0%. The weighted average remaining maturity was 12.3 and 12.0 years at
June 30, 1999 and December 31, 1998, respectively. The following table sets
forth as of June 30, 1999, the distribution of interest rates payable on the
Land Loans:
Percentage of
Principal Principal
Interest Rate Amount Amount
- ------------- --------- -------------
Less than 12.0%........................ $ 63,398,000 36.6%
12.0%-13.9%............................ 87,458,000 50.5
14.0% and greater...................... 22,418,000 12.9
------------ -----
Total............................. $173,274,000 100.0%
============ =====
As of June 30, 1999 and December 31, 1998, the Company's Land Loan
borrowers resided in 50 states, the District of Columbia and nine territories
or foreign countries.
b. VOI Loans
The Company purchases VOI Loans from various resort developers. The
Company generally targets small to medium size resorts with completed
amenities and established property owners associations. These resorts
participate in programs that permit purchasers of VOIs to exchange their
timeshare intervals for timeshare intervals in other resorts around the
world. During the six months ended June 30, 1999, the Company acquired
approximately $1,606,000 of VOI Loans. As of June 30, 1999 and December 31,
1998, the five largest developers accounted for approximately 32.6% and
35.1%, respectively, of the principal amount of the VOI Loans in the Serviced
Portfolio. No single developer accounted for more than 9.1% and 9.4% at June
30, 1999 and December 31, 1998, respectively.
As of June 30, 1999 and December 31, 1998, 3.0% and 4.1%, respectively, of
the Serviced Portfolio consisted of VOI Loans. The average principal balance
of such VOI Loans was approximately $3,300 and $3,400, at June 30, 1999 and
December 31, 1998, respectively. The following table sets forth as of June
30, 1999, the distribution of VOI Loans:
Principal Percentage of Number of Percentage of
Amount Principal Amount Loans Number of Loans
--------- ---------------- -------- ---------------
Less than $4,000...... $ 6,691,000 41.7% 3,290 67.1%
$4,000-$5,999......... 5,387,000 33.5 1,101 22.4
$6,000 and greater.... 3,979,000 24.8 515 10.5
----------- ----- ----- -----
Total............ $16,057,000 100.0% 4,906 100.0%
=========== ===== ===== =====
As of June 30, 1999 and December 31, 1998, the weighted average interest
rate of the VOI Loans included in the Company's Serviced Portfolio was 14.5%
and 14.6%, respectively, and the weighted average remaining maturity was 3.6
and 3.7 years, respectively. The following table sets forth as of June 30,
1999, the distribution of interest rates payable on the VOI Loans:
Percentage of
Principal
Interest Rate Principal Amount
- ------------- --------- ------
Less than 14.0%........................... $ 7,153,000 44.5%
14.0%-15.9%............................... 3,542,000 22.1
16.0% and greater......................... 5,362,000 33.4
----------- -----
Total................................ $16,057,000 100.0%
=========== =====
As of June 30, 1999, the Company's VOI borrowers resided in 50 states,
the District of Columbia and four territories or foreign countries. As of
December 31, 1998, the Company's VOI borrowers resided in 50 states, the
District of Columbia and three territories or foreign countries.
(2) Hypothecation Loans
The Company extends Hypothecation Loans to land dealers and resort
developers and other businesses secured by receivables. The Company has
expanded its marketing of Hypothecation Loans to include loans to other
finance companies secured by other types of collateral. These loans may be
larger than the Company's average Hypothecation Loans and may provide the
Company with an option to take an equity position in the borrower. During
the six months ended June 30, 1999, the Company extended or acquired
approximately $113.8 million of Hypothecation Loans, of which $20.6 million,
or 18.1%, were secured by Land Loans, $69.0 million, or 60.6%, were secured
by VOI Loans and $24.2 million, or 21.3%, were secured by other types of
collateral such as tax lien certificates, accounts receivable and mortgages.
The Company generally extends Hypothecation Loans based on advance rates
of 75% to 90% of the eligible receivables which serve as collateral. The
Company's Hypothecation Loans are generally made at variable rates based on
the prime rate of interest plus 1.5% to 4%. As of June 30, 1999 and December
31, 1998, the Company had $192.7 million and $164.5 million of Hypothecation
Loans outstanding, none of which were 31 days or more past due. During the
three months ended March 31, 1998, the Company acquired a $17.0 million
participation interest in a Hypothecation Loan from another financial
institution. As planned, in May of 1998, the Company purchased the
underlying receivables, which the Company has reclassified as Other Loans.
The proceeds of the receivables purchased were applied to pay off the
Company's participation interest. At June 30, 1999, Hypothecation Loans
ranged in size from $2,900 to $25.5 million with an average principal balance
of $2,095,000. At December 31, 1998, Hypothecation Loans ranged in size from
less than $500 to $21.5 million with an average balance of $1,678,000. The
five largest Hypothecation Loans represented 14.8% and 15.5% of the Serviced
Portfolio at June 30, 1999 and December 31, 1998, respectively.
(3) A&D Loans
The Company also makes A&D Loans to dealers and developers for the
acquisition and development of rural and timeshare resorts in order to
finance additional receivables generated by the A&D Loans. During the six
months ended June 30, 1999, the Company made $33.0 million of A&D Loans to
land dealers and resort developers, of which $2.7 million, or 8.2%, were
secured by land and $30.3 million, or 91.8%, were secured by resorts under
development.
The Company generally makes A&D Loans to land dealers and resort
developers based on loan to value ratios of 60% to 80% at variable rates
based on the prime rate plus 2% to 4%. As of June 30, 1999 and December 31,
1998, the Company had $64.6 million and $52.3 million, respectively, of A&D
Loans outstanding, none of which were 31 days or more past due. At June 30,
1999 and December 31, 1998, A&D Loans were secured by timeshare resort
developments and rural land subdivisions in 19 states and one territory and
16 states and one territory, respectively. A&D Loans ranged in size from
$3,500 to $11.8 million with an average principal balance of $979,000 at June
30, 1999. A&D Loans ranged in size from $1,700 to $9.5 million with an
average principal balance of $780,000 at December 31, 1998. The five largest
A&D Loans represented 5.4% and 4.7%, of the Serviced Portfolio at June 30,
1999 and December 31, 1998, respectively.
(4) Other Loans
At June 30, 1999, Other Loans consisted primarily of consumer home equity,
mortgage and construction loans, other secured commercial loans and tax lien
certificates. Historically, the Company has made or acquired certain other
secured and unsecured loans as it has identified additional lending
opportunities or lines of business for possible future expansion as it did
with VOI Loans and Hypothecation Loans. In May of 1998, the Company
purchased 232 builder construction loans totaling $32.7 million, a portion of
which had previously been collateral for the Hypothecation Loan in which the
Company owned a participation interest. At June 30, 1999 and December 31,
1998, the Company had 162 and 176 of the builder construction loans totaling
$37.4 million and $33.9 million, respectively. In October 1998, the Company
began purchasing tax lien certificates. At June 30, 1999 and December 31,
1998 the Company held $33.5 million and $21.2 million, respectively, of such
certificates. The Company had $82.5 million and $71.0 million of Other
Loans, 1.60% and 1.33% of which were 91 days or more past due at June 30,
1999 and December 31, 1998, respectively. At June 30, 1999, Other Loans
ranged in size from less than $500 to $1,101,000 with an average principal
balance of $11,900. At December 31, 1998, Other Loans ranged in size from
less than $500 to $875,000 with an average principal balance of $23,200. The
five largest Other Loans represent 0.8% of the Serviced Portfolio at June 30,
1999 and December 31, 1998.
Loan Underwriting
The Company has established loan underwriting criteria and procedures
designed to reduce credit losses on its Serviced Portfolio. The loan
underwriting process includes reviewing each borrower's credit history. In
addition, the Company's underwriting staff routinely conducts telephone
interviews with a sample of borrowers. The primary focus of the Company's
underwriting is to assess the likelihood that the borrower will repay the
loan as agreed by examining the borrower's credit history through credit
reporting bureaus.
The Company's loan policy is to purchase Land and VOI Loans from $3,000 to
$50,000. On a case by case basis, the Company will also consider purchasing
such loans in excess of $50,000. As of June 30, 1999, the Company had 163
Land Loans exceeding $50,000 representing 1.3% of the number of such loans in
the Serviced Portfolio, for a total of $11.3 million. There were no VOI Loans
exceeding $50,000 as of June 30, 1999. The Company will originate
Hypothecation Loans up to $15 million and A&D Loans up to $10 million. From
time to time, the Company may have an opportunity to originate larger
Hypothecation Loans or A&D Loans in which case the Company would seek to
participate such loans with other financial institutions. As of June 30,
1999, the Company's five largest Hypothecation Loan relationships had
aggregate loan balances ranging from $9.9 million to $25.5 million and its
largest A&D Loan relationship had an aggregate loan balance of $11.8
million. Construction Loans greater than $200,000 and any other loans
greater than $100,000 must be approved by the Credit Committee which is
comprised of the Chief Executive Officer, four Executive Vice Presidents and
a Senior Vice President.
Collections and Delinquencies
Management believes that the relatively low delinquency rate for the
Serviced Portfolio is attributable primarily to the application of its
underwriting criteria, as well as to dealer guarantees and reserves withheld
from dealers and developers. No assurance can be given that these delinquency
rates can be maintained in the future.
Collection efforts are managed and delinquency information is analyzed at
the Company's headquarters. Unless circumstances otherwise dictate,
collections are generally made by mail and telephone. Collection efforts
begin when an account is seven days past due, at which time the Company sends
out a late notice. When an account is fifteen days past due, the Company
attempts to contact the borrower to determine the reason for the delinquency
and to attempt to cause the account to become current. If the status of the
account continues to deteriorate, an analysis of the account is performed by
the collection manager to determine the appropriate action. When the loan is
90 days past due in accordance with its original terms and it is determined
that the amounts cannot be collected from the dealer or developer guarantees
or reserves, the loan is generally placed on a non-accrual status and the
collection manager determines the action to be taken. The determination of
how to work out a delinquent loan is based upon many factors, including the
borrower's payment history and the reason for the current inability to make
timely payments. When a guaranteed loan becomes 60 days (90 days in some
cases) past due, in addition to the Company's collection procedures, the
Company generally obtains the assistance of the dealer or developer in
collecting the loan.
The Company extends a limited number of its loans for reasons the Company
considers acceptable such as temporary loss of employment or serious illness.
In order to qualify for a one to three month extension, the customer must
make three timely payments without any intervention from the Company. For
extensions of four to six months, the customer must make four to six timely
payments, respectively, without any intervention from the Company. The
Company will not extend a loan more than two times for an aggregate six
months over the life of the loan. The Company has extended approximately 0.8%
of its loans through June 30, 1999. The Company does not generally modify any
other loan terms such as interest rates or payment amounts.
Regulations and practices regarding the rights of the mortgagor in default
vary greatly from state to state. To the extent permitted by applicable law,
the Company collects late charges and return-check fees and records these
items as additional revenue. Only if a delinquency cannot otherwise be cured
will the Company decide that foreclosure is the appropriate course of action.
If the Company determines that purchasing a property securing a mortgage loan
will minimize the loss associated with such defaulted loan, the Company may
accept a deed in lieu of foreclosure, take legal action to collect on the
underlying note or bid at the foreclosure sale for such property.
Serviced Portfolio
The following table shows the Company's delinquencies and delinquency
rates, net of dealer/developer reserves and guarantees, for the Serviced
Portfolio:
Six Months Ended
Year Ended December 31, June 30,
1998 1997 1996 1995 1994 1999
----------- ----------- ------------ ----------- ------------ -----------
Serviced
Portfolio...... $466,912,000 $304,102,000 $242,445,000 $176,650,000 $105,013,000 $529,198,000
Delinquent
loans (1)...... 4,456,000 3,642,000 3,255,000 3,062,000 981,000 5,486,000
Delinquency
as a Percentage
of Serviced
Portfolio...... .95% 1.20% 1.34% 1.73% .93% 1.04%
_____
(1) Delinquent loans are those which are 31 days or more past due which are
not covered by dealer/developer reserves or guarantees and not included in
other real estate owned.
Land Loans
The following table shows the Company's delinquencies and delinquency
rates, net of dealer/developer reserves and guarantees, for Land Loans in the
Serviced Portfolio:
Six Months Ended
Year Ended December 31, June 30,
1998 1997 1996 1995 1994 1999
------------ ------------ ------------ ---------- ---------- ------------
Land Loans in
Serviced Portfolio... $160,098,000 $142,828,000 $119,370,000 $97,266,000 $90,502,000 $173,274,000
Delinquent Land
Loans (1)............ 2,728,000 2,453,000 1,920,000 1,059,000 981,000 3,092,000
Delinquency as
a Percentage of
Land Loans in
Serviced Portfolio... 1.70% 1.72% 1.61% 1.09% 1.08% 1.78%
__________
(1) Delinquent loans are those which are 31 days or more past due which are
not covered by dealer/developer reserves or guarantees and not included in
other real estate owned.
VOI Loans
The following table shows the Company's delinquencies and delinquency
rates, net of dealer/developer reserves and guarantees, for VOI Loans in the
Serviced Portfolio:
Six Months Ended
Year Ended December 31, June 30,
1998 1997 1996 1995 1994 1999
----------- ----------- ----------- ----------- ---------- -----------
VOI Loans in
Serviced Portfolio... $19,119,000 $29,232,000 $43,284,000 $46,700,000 $2,851,000 $16,057,000
Delinquent VOI
Loans (1)........... 350,000 739,000 1,316,000 1,958,000 --- 421,000
Delinquency as a
Percentage of
VOI Loans in
Serviced Portfolio.. 1.83% 2.53% 3.04% 4.19% -- 2.62%
__________
(1) Delinquent loans are those which are 31 days or more past due which are
not covered by dealer/developer reserves or guarantees and not included in
other real estate owned.
Hypothecation, A&D and Other Loans
The Company did not have any delinquent Hypothecation Loans or A&D Loans
for the years ended December 31, 1994 through December 31, 1998 or for the
six months ended June 30, 1999. The Company did not have significant amounts
of delinquent Other Loans for the years ended December 31, 1994 through
December 31, 1997. At December 31, 1998, there were $71.0 million of Other
Loans of which $1,378,000 or 1.94% were 31 days or more past due and not
covered by dealer/developer reserves or guarantees and not included in other
real estate owned. At June 30, 1999, there were $82.5 million of Other Loans
of which $1,973,000 or 2.39% were 31 days or more past due and not covered by
dealer/developer reserves or guarantees and not included in other real estate
owned.
Allowance for Loan Losses and Estimated Recourse Obligations, Net Charge-offs
and Dealer Reserves
The following is an analysis of the total allowances for all loan losses:
Six Months
Ended
Year Ended December 31, June 30,
1998 1997 1996 1995 1994 1999
Allowance,
beginning of Period........... $5,877,000 $4,528,000 $3,715,000 $1,264,000 $1,064,000 $6,707,000
Net charge-offs of
uncollectible accounts..... (2,239,000 (2,010,000 (1,965,000) (946,000) (359,000) (1,157,000)
Provision for
loan losses.................. 1,532,000 1,400,000 1,954,000 890,000 559,000 1,000,000
Allocation of
purchase adjustment (1)...... 1,537,000 1,959,000 824,000 2,507,000 --- 995,000
---------- --------- -------- ---------- --------- ---------
Allowance, end of
period....................... $6,707,000 $5,877,000 $4,528,000 $3,715,000 $1,264,000 $7,545,000
========== ========= ========= ========= ========== ==========
__________
(1) Represents allocation of purchase adjustment related to the purchase of
certain nonguaranteed loans.
The following is an analysis of net charge-offs by major loan and
collateral types experienced by the Company:
Six Months
Ended
Year Ended December 31, June 30,
1998 1997 1996 1995 1994 1999
Land Loans............ $1,358,000 $ 986,000 $ 669,000 $ 546,000 $ 359,000 $ 784,000
VOI Loans............. 556,000 939,000 1,284,000 45,000 --- 124,000
Hypothecation Loans... --- --- --- --- --- ---
A&D Loans............. --- (2,000) (8,000) 352,000 --- ---
Other Loans........... 325,000 87,000 20,000 3,000 --- 249,000
--------- -------- --------- ---------- -------- --------
Total net charge-offs. $2,239,000 $2,010,000 $1,965,000 $946,000 $359,000 $1,157,000
========= ========= ========= ========== ======== ========
Net charge-offs as a
percentage of the average
Serviced Portfolio.... .58% .74% .94% .67% .38% .46%
As part of the Company's financing of Land and VOI Loans, the Company
enters into arrangements with most land dealers and resort developers whereby
the Company retains a portion of the amount payable to a dealer when
purchasing a Land or VOI Loan to protect the Company from potential losses
associated with such loans and uses the amount retained to absorb loan
losses. The Company negotiates the amount of the reserves with the land
dealers and resort developers based upon various criteria, two of which are
the financial strength of the land dealer or resort developer and the credit
risk associated with the loans being purchased. Dealer reserves for Land
Loans were $8,219,000, $8,321,000 and $7,555,000 at December 31, 1998, 1997
and 1996, respectively, and $8,749,000 at June 30, 1999. Developer reserves
for VOI Loans were $1,760,000, $2,299,000 and $3,072,000 at December 31,
1998, 1997 and 1996, respectively, and $1,284,000 at June 30, 1999. Most
dealers and developers provide personal and, when relevant, corporate
guarantees to further protect the Company from loss.
Loan Servicing and Sales
The Company retains the right to service all the loans it purchases or
originates. Servicing includes collecting payments from borrowers, remitting
payments to investors who have purchased the loans, accounting for principal
and interest, contacting delinquent borrowers and supervising foreclosure and
bankruptcies in the event of unremedied defaults. Substantially all servicing
results from the origination and purchase of loans by the Company, and the
Company has not historically purchased loan servicing rights except in
connection with the purchase of loans. Servicing rates generally approximate
.5% to 2% of the principal balance of a loan.
Historically, the Company subcontracted the servicing of its loans to an
unaffiliated third party. In July 1998, the Company resumed certain customer
service and collection functions. The unaffiliated third party will continue
to provide certain data processing and payment processing functions. The
Company retains responsibility for servicing all loans as a master servicer.
In 1990, the Company began privately placing issues of pass-through
certificates evidencing an undivided beneficial ownership interest in pools
of mortgage loans which have been transferred to trusts. The principal and a
portion part of the interest payments on the loans transferred to the trust
are collected by the Company as the servicer of the loans, remitted to the
trust for the benefit of the investors, and then distributed by the trust to
the investors in the pass-through certificates.
As of June 30, 1999, the Company had sold or securitized a total of
approximately $613.4 million in loans at face value. In certain of the
Company's issues of pass-through certificates, credit enhancement was
achieved by dividing the issue into a senior portion which was sold to the
investors and a subordinated portion which was retained by the Company. In
certain other of the Company's private placements, credit enhancement was
achieved through cash collateral.
If borrowers default in the payment of principal or interest on the loans
underlying these issues of pass-through certificates, losses would be
absorbed first by the subordinated portion or cash collateral account
retained by the Company and might, therefore, have to be charged against the
estimated recourse obligations to the extent dealer guarantees and reserves
are not available.
The Company also has a $150.0 million revolving line of credit and sale
facility for its Land Loans as part of an asset backed commercial paper
facility with a multi-seller commercial paper conduit. The facility expires
in June 2001. As of June 30, 1999, the outstanding balance of the sold or
pledged loans securing this facility was $138.0 million. The Company has an
additional revolving line of credit and sale facility for its VOI Loans of
$25.0 million with another multi-seller commercial paper conduit. The
facility expires in March 2000. As of June 30, 1999, the outstanding
aggregate balance of the sold loans under the facility was $14.6 million.
Marketing and Advertising
The Company markets its program to rural land dealers and resort
developers through brokers, referrals, dealer and developer solicitation, and
targeted direct mail. The Company employs three marketing executives based in
Lakewood, Colorado, five marketing executives based in Williamstown,
Massachusetts, two marketing executives based in Hoover, Alabama, three
marketing executives based in Scottsdale, Arizona and one marketing executive
based in Atlanta, Georgia. In the last five years the Company has closed
loans with over 350 different dealers and developers.
Management believes that the Company benefits from name recognition as a
result of its referral, advertising and other marketing efforts. Referrals
have been the strongest source of new business for the Company and are
generated in the states in which the Company operates by dealers, brokers,
attorneys and financial institutions. Management and marketing
representatives also attend trade shows to improve awareness and
understanding of the Company's programs.
Regulation
The Company is licensed as a lender, mortgage banker or mortgage broker in
20 of the states in which it operates, and in those states its operations are
subject to supervision by state authorities (typically state banking or
consumer credit authorities). Expansion into other states may be dependent
upon a finding of financial responsibility, character and fitness of the
Company and various other matters. The Company is generally subject to state
regulations, examination and reporting requirements, and licenses are
revocable for cause. The Company is subject to state usury laws in all of the
states in which it operates.
The consumer loans purchased or financed by the Company are subject to the
Truth-in-Lending Act. The Truth-in-Lending Act contains disclosure
requirements designed to provide consumers with uniform, understandable
information with respect to the terms and conditions of loans and credit
transactions in order to give them the ability to compare credit terms.
Failure to comply with the requirements of the Truth-in-Lending Act may give
rise to a limited right of rescission on the part of the borrower. The
Company believes that its purchase or financing activities are in substantial
compliance in all material respects with the Truth-in-Lending Act.
Origination of the loans also requires compliance with the Equal Credit
Opportunity Act of 1974, as amended ("ECOA"), which prohibits creditors from
discriminating against applicants on the basis of race, color, sex, age or
marital status. Regulation B promulgated under ECOA restricts creditors from
obtaining certain types of information from loan applicants. It also requires
certain disclosures by the lender regarding consumer rights and requires
lenders to advise applicants of the reasons for any credit denial. In
instances where the applicant is denied credit or the interest rate charged
increases as a result of information obtained from a consumer credit agency,
another statute, the Fair Credit Reporting Act of 1970, as amended, requires
the lenders to supply the applicant with a name and address of the reporting
agency.
Competition
The finance business is highly competitive, with competition occurring
primarily on the basis of customer service and the term and interest rate of
the loans. Traditional competitors in the finance business include commercial
banks, credit unions, thrift institutions, industrial banks and other finance
companies, many of which have considerably greater financial, technical and
marketing resources than the Company. There can be no assurance that the
Company will not face increased competition from existing or new financial
institutions or finance companies. In addition, the Company may enter new
lines of business that may be highly competitive and may have competitors
with greater financial resources than the Company.
The Company believes that it competes on the basis of providing
competitive rates and prompt, efficient and complete service, and by
emphasizing customer service on a timely basis to attract borrowers whose
needs are not met by traditional financial institutions.
Employees
As of June 30, 1999, the Company had 125 full-time equivalent employees.
None of the Company's employees is covered by a collective bargaining
agreement. The Company considers its relations with its employees to be good.
Facilities
The Company owns a leasehold interest in approximately 26,000 square feet
of office space in Williamstown, Massachusetts, which is used as the
Company's headquarters. The initial ten year lease term expires in May 2007
and is renewable at the Company's option for two additional ten year
periods. The initial land lease provides for an annual rental of $20,000.
The Company also occupies an aggregate of approximately 5,100 square feet of
office space in Lakewood, Colorado, pursuant to a lease expiring in January
2001, with an option to renew until 2004, providing for an annual rental of
approximately $56,000, including utilities and exterior maintenance
expenses. A subsidiary of the Company occupies an aggregate of approximately
2,710 square feet of office space in Scottsdale, Arizona, pursuant to a lease
expiring September 2000, providing for an annual rental of approximately
$46,000. A subsidiary of the Company occupies an aggregate of approximately
6,100 square feet of office space in Hoover, Alabama, pursuant to a lease
expiring in December 1999, providing for an annual rental of approximately
$88,000. A subsidiary of the Company occupies an aggregate of approximately
1,001 square feet of office space in Atlanta, Georgia, pursuant to a lease
expiring in December 2000, providing for an annual rental of approximately
$14,500.
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are filed herewith:
1.1 Underwriting Agreement dated May 13, 1999 between the Company, Tucker
Anthony Cleary Gull and Ferris, Baker Watts Incorporated.
2.1 Agreement and Plan of Merger dated June 16, 1999 among Litchfield
Financial Corporation, Stamford Asset Recovery Corporation, Ironwood
Acceptance Company, LLC and the members of the Company.
2.2 Agreement and Plan of Merger dated April 1, 1999 among Litchfield
Financial Corporation, Stamford Business Credit Corporation and Land
Finance Corporation.
4.12 Junior Subordinated Indenture dated as of May 19,1999 between the
Company and The Bank of New York.
4.13 Supplemental Indenture No. 1 dated as of May 19, 1999 between the
Company and The Bank of New York.
4.14 Amended and Restated Declaration of Trust of Litchfield Capital Trust
I dated as of May 19, 1999 by and between John J. Malloy, Heather A.
Sica, Ronald E. Rabidou, The Bank of New York, The Bank of New York
(Delaware), the Company and the holders, from time to time, of
undivided beneficial interests in the assets of Litchfield Capital
Trust I.
4.15 Amendment No. 1 to the Amended and Restated Declaration of Trust
of Litchfield Capital Trust I dated as of May 19, 1999 by an
between John J. Malloy, Heather A. Sica, Ronald E. Rabidou,
The Bank of New York, The Bank of New York (Delaware), the Company
and the holders, from time to time, of undivided beneficial
interests in the assets of Litchfield Capital Trust I.
4.16 Guarantee Agreement dated as of May 19, 1999 between the Company and
The Bank of New York.
4.17 Guarantee Agreement dated as of June 8, 1999 between the Company and
The Bank of New York.
10.193 Amendment No. 1 to the Indenture of Trust dated as of March 1,
1999, between Litchfield Hypothecation Corporation 1997-B and
The Chase Manhattan Bank.
10.194 Amendment No. 2 to the Indenture of Trust dated as of June 1, 1999,
between Litchfield Hypothecation Corporation 1997-B and The
Chase Manhattan Bank.
10.195 Amendment No. 3 to the Indenture of Trust dated as of March 1,
1999, between Litchfield Hypothecation Corporation 1998-A and
The Chase Manhattan Bank.
10.196 Amendment No. 4 to the Indenture of Trust dated as of June 1, 1999,
between Litchfield Hypothecation Corporation 1998-A and The
Chase Manhattan Bank.
10.197 Loan and Security Agreement dated as of May 28, 1999, between the
Company and MetroWest Bank.
10.198 Note Purchase Agreement dated as of June 28, 1999, among the
Company, Litchfield Hypothecation Corporation 97-B and Union
Bank.
10.199 Limited Guarantee dated as of June 1, 1999, between the Company and
Union Bank.
10.200 Note Purchase Agreement dated as of June 28, 1999, among the
Company, Litchfield Hypothecation Corporation 98-A and
BankBoston.
10.201 Limited Guarantee dated as of June 1, 1999, between the Company and
BankBoston.
10.202 Receivables Purchase Agreement dated as of June 30, 1999, between
the Company and First Massachusetts Bank.
10.203 Collateral Agent Agreement dated as of June 30, 1999, among The
Chase Manhattan Bank, First Massachusetts Bank and the
Company.
11.1 Statement re: computation of earnings per share
27.1 Financial Data Schedule
Reports on Form 8-K
Form 8-K filed June 25, 1999 regarding the acquisition of
Ironwood Acceptance Company.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LITCHFIELD FINANCIAL CORPORATION
DATE: August 13, 1999 /s/ Richard A. Stratton
RICHARD A. STRATTON
Chief Executive Officer,
President and Director
DATE: August 13, 1999 /s/ Ronald E. Rabidou
RONALD E. RABIDOU
Chief Financial Officer, Executive
Vice President and Treasurer